The missing component to wealth: Defense

19 thoughts on “The missing component to wealth: Defense”

  1. What a great reminder! Mr. Adventure Rich and I finally set up a will/trust about a year ago and the sense of relief we felt knowing that we were protecting our assets and making our wishes known in the case of a tragedy was an incredible relief. I would consider that a form of defense (along with our various insurance policies) 🙂

  2. I’m sorry but I don’t really understand this post. The first part (particularly the odd “example”) seems mostly unrelated to the second part, which is saying what exactly? That we should make sure to buy a bunch of types of insurance most of which we are already legally required to have?

      1. I just don’t understand how a defensive strategy in general and buying insurance specifically addresses the example you gave where a person’s retirement savings end up being less than expected due to return variability, taxes, inflation etc. (the losses in the example itself seem extreme and unrealistic to me as well but that’s a separate issue). If anything, it seems like defensive strategies make those specific problems worse.

  3. Although this article is inherent to a certain early retirement strategy (using the 4% SWR), there are a lot of good points being made. It’s difficult to have a bullet proof plan when a ‘black swan’ event occurs which you have never anticipated (or not enough).

    It got me thinking in how I play the defense part, and part of that plan is purely based on where I live. In the Netherlands my pension is set for me, as long as I work for a boss. Additionally, when I reach a certain age (probably 70) I will receive some sort of government supported income. Of course these things/rules/laws can change. And they did! Which is exactly why I started to invest in the first place.
    I don’t make use of the 4% rule to cover my income later on, instead I invest in a mix of income producing assets. To accelerate growth on the short term, and to have more flexibility on the long term.

    I believe a lot of people working towards early retirement are already thinking about the defense part. I’ve read many articles that describe how to deal with specific events, or how to alter your mindset from ‘if he can retire early so can I’ to ‘what do I need to do to make it happen’. Secondly, early retirement isn’t only about tapping in your nest egg to live the remainders of your life, but also about finding new ways as an alternative to the status quo.

    1. That is great many early retirees you know are thinking beyond the status quo…..I my experience that is not the case.

  4. I think asset protection is important and while in the middle of my professional life as a doctor I am more acutely aware of it. Lawsuits come and some of them may lead to needing to pay out a chunk of cash, that is where malpractice insurance comes into play. Car accidents also happen and sometimes docs are seen as easy targets and further lawsuits come, but can be mitigated with auto and umbrella insurance.

    One area I disagree though is the need for term life or disability insurance if you have saved enough money to cover the majority of future expenses. I think there is a point where these insurances can be cancelled due to the money in the bank. Basically you are self insuring.

    1. Yes. Unfortunately, it has become not if doctors will be sued…but when. I think it is important to look at true risk management and spreading off risk to another entity. Many if not most successful people do not self insure in many areas.

  5. I take the point that defense is equally as important as offense. Most of us who frequent personal finance and early retirement blogs will be intimately familiar with the pitfalls of fees/inflation/etc. you cite in your example, as well as that of inadequate insurance.

    As a doctor, I (like DDD) am more cognizant of the threat of financial ruin due to lawsuits, and my insurance protection reflects that knowledge. However, I am also careful not to overinsure, which can be equally detrimental to one’s retirement nest egg. Everyone needs insurance, but the specific types and amounts should be tailored to that individual’s financial situation, risk tolerance, and even personality to some degree.

    1. I do not disagree. However, many people do use average rates of return and they are only valuable if past performance is an indication of future results. I do apologize that it is only half of an actual solution. Unfortunately, that is a limitation of this sort of media. We all want quick answers and immediate gratification but that doesn’t seem to be working out as that is what the industry is shelling out.
      It is extremely difficult to preplan asset allocations. Too many variable and potential scenarios could play out.

  6. I think there is some confusion (or misrepresentation) on the S&P 500 returns. I agree that we shouldn’t use “average” returns, but the CAGR is indeed an accurate number to use. If this example person got a 11%+ CAGR then they’d have the full $7m+ as expected. I think only Dave Ramsey a few other light-and-fluffy people actually use “average” returns anymore. BTW, the CAGR is still in the 10% range, so a great way to grow wealth.

    It’s too bad there wasn’t a list of specific defensive strategies. I feel like this post only took me half-way to some sort of solution.

    Because of sequence of returns risk, there is a good argument for shifting some money into bonds vs 100% stocks as you approach retirement. Even then though – with let’s say 40% bonds – there are a few good (and easy) ways to build a portfolio that gives north of 7% returns. That means after inflation, and a 4% drawdown rate, your money continues to grow – not run out in the extreme as the example given.

    1. I do not disagree. However, many people do use average rates of return and they are only valuable if past performance is an indication of future results. I do apologize that it is only half of an actual solution. Unfortunately, that is a limitation of this sort of media. We all want quick answers and immediate gratification but that doesn’t seem to be working out as that is what the industry is shelling out.
      It is extremely difficult to preplan asset allocations. Too many variable and potential scenarios could play out.

  7. Some interesting points. It’s possible to be too defensive as well. Investors shouldn’t overdo it.

    The likelihood of both good and bad events happening at any point in time is fairly likely. I’ve always tried to prepare for both….either direction the results will be OK.

  8. I am struggling with this post. First the argument is made with some soft financial assumptions that the person who is saving diligently roughly has a 1/3 of what he or she thought they could accumulate. I use the term “soft” because there are no benefits attributed to pre-tax savings or a monte-carlo simulation of the expected ending balance. I’m sure we could design a scenario where the individual bought the S&P500 on the dips and sold at the top where the gains would be higher than the average. In summary, the math projections all look like maximum loss type scenarios.

    In the second part of the article, we focus on defensive strategies like insurance, reducing returns for liquidity, etc. Why haven’t we touched the elephant in the room? The most defensive strategy is to work until you die.

    If we set the two goal posts as work until you die or run out of money and resources before you die, you can establish the worst-case scenarios in planning for the future. Don’t you think that we also need defensive strategies to protect those afraid of working until they pass away or having a huge amount left in the bank?

    My concern is the conventional wisdom is around one-scenario (bankruptcy) and not the other (working your life away).

  9. Defense is definitely an important area that is often overlooked. Last year I finally purchased Umbrella insurance which wasnt very expensive at all. I’m convinced you can be sued for almost anything these days. Even if the lawsuit is ridiculous, I believe the judge will let it go forward in the interest of “being fair”. Do the right things, live smart, and staying out of trouble all help to avoid bad situations that can undermine your finances.

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